status as an oil producer by 2026.
imports in the coming years.30 This would exert a significant negative impact on Algeria’s macroeconomic balances through deterioration of 4 to 5 percent of GDP in the fiscal balance and of 6 to 7.5 percent in the current account balance by 2015.31
By way of historical analogy, it is ominous that the decline in international oil prices in the mid-1980s significantly contributed to Algeria’s precocious Arab Spring, the 1988 popular protests and breakdown of Algeria’s state-soci-ety relations. At the time, the government lost its financial capacity to draw on hydrocarbon revenues to absorb the country’s growing social and political discontent. The failure to use available resources today to develop competi-tive economic activities outside the energy sector is exposing Algeria to serious dangers tomorrow.
Already, Algeria’s public spending has risen so substantially since the erup-tion of the Arab uprisings as to push up the fiscal breakeven oil price, or the oil price required to balance the government’s budget. That breakeven price edged upward from around $73 per barrel in 2008 to more than $110 per barrel in 2012 (see figure 5).32 With the average price of oil hovering around $100 per barrel, the government is tapping the country’s sovereign wealth fund, known as the Revenue Stabilization Fund, to maintain the current pace of spending.33 The fund, which is a government subaccount at the central bank, collects oil-tax surpluses that are calculated on the basis of the difference between the oil price on the international market and a reference price of $37 per barrel. The government transfers any surplus to the fund and withdraws from it to finance budget deficits in case oil-tax revenues are insufficient.
The fund’s objective was initially to draw down Algeria’s external debt. As the external debt was almost entirely paid back by 2006,34 the fund’s key pur-pose since then has been to support domestic government funding for public investment programs under the five-year plans for 2005–2009 and 2010–2014.
The fund is, however, increasingly used to keep up with increases in current spending. And it is rapidly being depleted. The most optimistic estimates by the Figure 5. Price of Oil and Fiscal Breakeven Estimates
40 60 80 100 120
2006 2007 2008 2009 2010 2011 2012 Fiscal breakeven
U.S. Dollars per Barrel
Average oil price
Source: Based on IMF data and author’s calculations
International Monetary Fund reveal that by 2016, the Revenue Stabilization Fund could represent less than 16 percent of GDP, which is half its 2010 level.
Under an alternative scenario of lower international prices, the fund might decrease to 4 percent of GDP by 2016, forcing fiscal deficits to be financed by higher government borrowing.35
Overall, Algeria’s economy remains extremely overdependent on this dimin-ishing oil and gas sector, even compared with other oil producers in the region.
Algeria stands as one of the least diversified of comparable economies. The agricultural sector contributes just 8 percent of GDP, and the manufacturing sector contributes only 5 percent. Only a few sectors, such as construction and public works, and the demand created by a large public administration contrib-ute to Algeria’s economic growth. And even this demand is fueled by hydro-carbon rents. This lack of diversification has only intensified in recent years.
Data released in 2011 by the minister of industry and small- and medium-size enterprises reveal that fewer than 50 exporting firms existed in Algeria in 2010, compared with 280 firms in the early 1980s.
Policymakers have recently exacerbated this trend by reversing previously implemented economic liberalization policies or renegotiating international commitments so as to protect the interests of a minority of rent seekers. For example, Algerian authorities decided to launch a new round of negotiations with the European Union to delay the implementation of the agreed-upon free trade agreement from 2017 to 2020. Another example is the decision to delay Algeria’s accession process to the World Trade Organization to protect a few inefficient local producers from foreign competition. The government also introduced new restrictions on foreign direct investment in 2009, impos-ing an upper limit of 49 percent foreign ownership in any new foreign-direct-investment project.36
Despite its market of 37 million consumers, Algeria’s poor business envi-ronment and the instability of its laws and regulations on investment make it somewhat unattractive to foreign investors. Most small- and medium-size private enterprises suffer from entry barriers, limited access to bank funding, and a legal environment unfriendly to competition. As a result, both domestic and foreign investors are deterred from launching industrial and services proj-ects that could strengthen Algeria’s economy and improve its competitiveness.
According to the World Bank’s Doing Business 2012 report, which ranks coun-tries based on the ease of doing business with them, Algeria ranks 148 of 183 states—behind most Middle Eastern and North African countries37—and has been losing ground (see figure 6).
Algeria’s economic growth suffers as a result of its unattractive business cli-mate. Although public investment has been more than twice that of neighbor-ing countries such as Morocco and Tunisia over the past half-dozen years, Algeria has not achieved the same level of economic growth as its neighbors.
Indeed, compared with a sample of countries in the Middle East, Africa, Asia, and Latin America, Algeria emerges as an outlier that combines an abnormally high level of public spending with mediocre economic growth (see figure 7).
Figure 6. Algeria’s 2012 “Doing Business” Rankings
148 153
Source: World Bank, “Economy Profile: Algeria,” Doing Business 2012
Figure 7. Interaction Between Capital Spending and Economic Growth
Capital Spending as a Share of GDP
Source: Author’s calculations based on World Bank Indicators, http://data.worldbank.org/indicator
These poor results can be attributed to the deficient policy framework guid-ing Algeria’s public investment. In part because public expenditure is aimed at buying loyalty, not at strengthening the economy, many projects are not subjected to any economic analysis and bear little relationship to strategic objectives. Because policymakers endowed with oil revenues tend to overlook efficiency and cost-benefit analyses—and because contracts themselves are often patronage deals understood to include corrupt skimming of funds—
project costs regularly exceed reasonable standards.
The responsibility for a project’s effectiveness tends to overlap among mul-tiple authorities and parties in 25 ministerial commissions and 48 provincial commissions, many of which suffer from institutional and governance prob-lems. Most of the time, project implementation drags on much longer than planned, and many projects are left unfinished while others cannot be effec-tively used because of recurrent resource shortages.38 Monitoring and oversight is either weak, ineffective, or completely absent. A telling illustration of all these shortcomings is that out of the $286 billion budget the government ear-marked for public investment during the current five-year plan, $130 billion was set aside to pay for completing unfinished projects launched under the previous five-year plan.39
As of now, there is no serious economic planning under way to target public expenditure in such a way as to expand and diversify Algeria’s private sector, promote education and the acquisition of marketable skills, or otherwise miti-gate the swiftly approaching shock of the end of Algeria’s oil bonanza.